Royal Dutch Shell Plc said it planned even deeper cuts to its oil refining and retail operations after downstream weakness caused a 75 percent fall in fourth-quarter profits to $1.18 billion.

Chief Executive future Peter Voser pledged $1 billion in cost cuts and 1,000 job reductions in 2010 -- mainly to come from the downstream unit -- and upped his target for refinery divestments.

Europe's second largest oil company by market value added it would continue to shift the focus of its downstream business to Asia, where rising fuel demand could ensure better profits.

Shell also affirmed its targets to grow oil and gas production, the main driver for oil companies' earnings, by 2-3 percent over 2009-2012, but analysts said investors' near term focus would remain on the downstream.

The strong growth story remains overshadowed by Shell's refining exposure, Alexandre Weinberg, oil analyst at Petercam said.

Shell's London-listed A shares traded down 1.9 percent at 1,741.5 pence at 1207 GMT, lagging a 0.6 percent drop in the DJ Stoxx European oil and gas sector index <.SXEP>.

Excess refining capacity, due to lower fuel demand caused by the global recession, and new refinery startups in the Middle East and Asia, has hit crude processing margins and profits at all the oil majors.

The largest western oil company by market value, Exxon Mobil , had a 23 percent drop in fourth-quarter net income while the second-largest U.S. oil company, Chevron had a 37 percent drop.

However, Shell's especially large refinery portfolio and the poor quality of some of its assets has seen it hit worse than its rivals.

Finnish refiner Neste Oil and Europe's largest independent refiner, Swiss-based Petroplus

on Thursday highlighted the tough crude processing environment in Europe, reporting losses.


Voser said a turnaround he launched last year was yielding dividends with $2 billion cost savings in 2009, exploration success and the startup of new projects.

After seven years of falling output, Voser predicts stable production of oil and gas in 2010 and a rise thereafter.

Some analysts believe Voser's actions will lead to stronger profit growth than its rivals in coming years.

The stage should be set for Shell to begin a period of stronger relative performance based on delivery of restructuring benefits, said Mark Bloomfield, oil analyst at Citigroup said.

However, Gordon Gray at Collins Stewart said he had reduced his 2010 earnings per share forecast by 6 percent to reflect persistent downstream weakness.

Excluding a charge of $1.6 billion related to one-off items, Shell's clean net profit was $2.77 billion, short of an average forecast of $2.87 billion from a Reuters poll of ten analysts.

The collapse in refining margins and weaker retail profits caused a $1.76 billion loss in the downstream unit. Sharply lower gas prices meant upstream profits also fell, despite a recovery in oil prices.

Gas accounts for around 47 percent of Shell's production, compared with around 36 percent at larger rival BP Plc .

London-based rival BP managed to report a 33 percent rise in profits in the quarter compared to the same period in 2008 because of its relatively low reliance on natural gas and a smaller and better quality refining portfolio.

Shell has steadily increased its planned scale back in refining in the past year. In July it said it may close or sell 8 percent of its 3.87 million barrels per day refining capacity.

In September, Shell upped the figure to 15 percent.

Voser said on Thursday he was still reviewing the future of 15 percent of the portfolio, but since he said this excluded the Montreal refinery which Shell said last month it planned to convert into a fuel terminal, the latest target is equivalent to an 18 percent reduction on the original basis.

Shell said oil and gas production fell 2.4 percent in the quarter compared to the same period last year, to 3.3 million barrels of oil equivalent per day.

(Editing by Victoria Bryan, Mike Nesbit)